Considerations for Day 2 compliance with ASC 842

Optimization can lead to operational improvements and reduced costs

Jun 16, 2020

The ASC 842 lease accounting standard can result in operational improvements for your business and help you identify cost-savings in some contracts. However, the time and effort required to maintain compliance could present obstacles to realizing those gains. 

It is crucial to plan for your ongoing lease management activities. After your business adopts the new lease accounting standard, several considerations can help you optimize the process, maintain compliance and reap the rewards of doing so.

Lease evaluation

Because all leases are now on the balance sheet, the new lease standard requires ongoing emphasis on ensuring completeness of your lease population and attention to detail in the lease review process. It is necessary to establish robust policies and procedures to address lease-related topics, such as lease modifications and reassessments, determination of incremental borrowing rates, and impairment considerations. Certain areas may involve significant management judgment, such as lease term changes and purchase option assessments. They also could require remeasurement of the related lease liability and right-of-use asset. 

Prachi Jain, a senior manager who specializes in lease accounting for RSM US LLP’s technical accounting consulting team, stresses the importance of understanding not only the events that trigger a lease reassessment, but also the underlying questions they present. “How do they get factored into your accounting considerations, and how do you manage that?” Jain said. “How are you going to make sure that business units are aware of when a lease change should be involved? And what are the right steps to take before they contact accounting?”

The importance of ensuring completeness of the lease portfolio also has financial reporting ramifications. RSM has gleaned themes and trends in SEC comments about how public companies have implemented the standard and disclosed information related to leasing activities. SEC feedback has commonly centered on either lease accounting complexity (clarification of a company’s determination of certain judgments and assumptions) or disclosure enhancements. 

Software solution

RSM recommends managing your lease portfolio with a third-party lease accounting software program if you have more than 50 leases, although lease accounting software could be necessary for a much smaller portfolio that has greater complexity. Software companies have improved their functionality, customer support and pricing over the last year, which can make the investment in lease accounting software more attractive for companies of all sizes.

There are significant accounting, procurement and administrative benefits that can be gained from lease accounting software, such as automated quantitative disclosure reports; processing of leases involving multiple currencies; accounting for lease renewal, termination and buy-out options; and performing lease modifications with a few clicks. These programs also help centralize and provide access to key lease data to aid in the procurement process (e.g., lease-versus-buy). They also provide lease administration functionality for ongoing compliance, such as automated notifications for critical dates and forecasting and budgeting tools.

Center of excellence

Implementing a center of excellence (COE) for lease accounting, lease procurement and lease administration can drive significant value throughout the organization. A COE would include in-house experts that are fluent in ASC 842; this cultivates a deeper level of internal expertise in the complexities of the standard and minimizes the need for external consultants. The COE establishes stronger internal controls, enabling your company to identify anomalies in leasing data and issues that arise with lease reassessments. Overall, the COE drives more accurate financial reporting and operational efficiency.

The upside

By focusing efforts on compliance with ASC 842 and optimizing lease procurement and lease administration, your organization could realize improvements in operations and reduce costs. The new lease accounting standard enables companies to properly structure leases to maximize value because there is no longer a financial reporting incentive to keep leases off the balance sheet. Now, companies are executing lease contracts that make financial sense. 

In addition, organizations can make clearer lease-versus-buy decisions due to improved visibility of company-wide leasing arrangements. The new lease standard lends itself to strategic sourcing from vendors, economies of scale and bulk pricing. Companies also now have greater insight into evergreen month-to-month payments. Most companies previously did not closely monitor their evergreen leases, which are often at a premium. The notification feature in most lease accounting software programs enables companies to proactively manage their lease portfolio to reduce evergreen payments. That underscores how tracking your lease portfolio empowers better decisions.

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